Saudi economy booming

Saudi Arabia Looks Past Oil in Attempt to Diversify

Jad Mouawad

New York Times 13 December 2005

RIYADH, Saudi Arabia - The ultimate oil state is seeking to shift its economy away from oil.
Saudi Arabia may be experiencing its third oil boom in three decades but it is also undergoing an economic revolution that its leaders hope will finally insulate it from the oil producer's curse: the next price collapse.

The Saudi kingdom remains the 600-pound gorilla of the global oil market. Given its vast reserves, Saudi Arabia can keep pumping oil for the next 70 years. Oil, along with Islam's holy cities, Mecca and Medina, provides the country's rulers with wealth, power and influence. Oil sales account for 40 percent of the economy and about 90 percent of government revenue. But that reliance on a volatile commodity - with big booms but also big busts - is also a problem that the royal family is determined to overcome. The nation's leaders, of course, have made similar vows before to translate their vast oil wealth into a more diversified economy. Will this time really be different?

There are signs that it may be. Unnoticed by many outsiders, the Saudi private sector has flourished in recent years, thanks to structural changes started by King Abdullah in the late 1990's when he was crown prince and oil prices were at $10 a barrel. "There's a gold rush in Saudi Arabia right now," said Mohammed al-Sheikh, a Saudi lawyer associated with the White & Case law firm here in Riyadh, the capital. "You can feel it everywhere in the economy. Everyone wants to invest here."

Driven by a construction boom that is already replacing many of the buildings thrown up in the 1970's, sprawling shopping malls, paved with white marble and featuring Gucci stores and Starbucks coffee shops, have become fixtures of the landscape in Riyadh, Khobar and Jeddah.
Analysts at the Samba Financial Group in Riyadh expect the economy to grow by 6.5 percent this year thanks to record oil prices, which have helped fuel the third consecutive year of rapid expansion. But the private sector, which also stands apart from the state-run oil industry, has outpaced the rest of the economy for 7 of the last 11 years and is expected to grow 7.4 percent this year. "The diversification of our national income and our economy away from oil is key to our well being," said Abdullah Alireza, a minister without portfolio and a member of the Supreme Economic Council. "It's absolutely key."

The Saudi stock market has become one of the world's top performers, and growth in its market value for this year is about twice as large as the country's oil revenues.

Saudi Arabia is also opening to real competition. It joined the World Trade Organization on Sunday after 12 years of negotiations, a move expected to give a powerful push to the country's private sector. "It's going to be a long road to bring ourselves up to international standards," said Fouad al-Humoud, a local businessman, sitting in his office in the center of this sprawling city, at the end of a long strip of neon-lighted stores. "But we have a tsunami of opportunities here. No one wants to be left on the back seat."

The government has relaxed foreign ownership laws, loosened credit rules, liberalized the telecommunications market, passed a new capital markets law and created regulatory agencies to oversee these changes. "That's a structural shift," said Brad Bourland, chief economist of Samba. "In terms of reforms, this is where the rubber meets the road, because it creates a regulatory environment where a private economy can operate."

Unlike in the oil booms of the past, Saudi companies are the main beneficiaries of today's bonanza. Major local industries, like petrochemicals, mining, plastics or fertilizers, have been created from scratch. Sabic, the Saudi Basic Industries Corporation, is now the largest nonoil company in the Middle East; Ma'aden, the government-owned mining company, is not far behind. "They feel the need to develop industries that create added value and jobs and develop fields where they have a natural advantage," said Jean-François Seznec, a professor at the Middle East Institute of Columbia University.

Abdallah Dabbagh, the president of Ma'aden, told a group of reporters on a recent visit here that within 10 to 15 years he expected Saudi Arabia to dominate the fertilizer business. "The world will depend on Saudi Arabia for its food the same way it depends on its energy today," he said.
That's an exaggeration, but Saleh al-Husseini, a member of the Majlis al-Shura, a consultative assembly appointed by the king, claims that the current boom is more sustainable than past oil-led expansions. "Saudi businessmen have gained a huge experience since the first oil boom," Mr. Husseini said.

Like most oil producers, Saudi Arabia has found that oil was as much a curse as a blessing. In the 1970's, the state modernized rapidly; built roads, schools, hospitals and universities; and gave safe government jobs to its people. But when energy prices collapsed, the state found it could not pay all its bills. "They have learned the lessons from the first and the second oil booms," said El-Mostafa Benlamlih, the resident coordinator for the United Nations here. "These had lots of redistribution, lots of consumption, lots of public sector recruitment and lots of waste. I don't think they'll go down that road anymore."

This year, analysts estimate the kingdom will earn between $150 billion and $160 billion from oil sales, a figure exceeded only in 1974 and the early 1980's. Thanks to its budget surplus, the government raised public salaries by 15 percent, for the first time in two decades; it also laid out a more smartly devised $8 billion public works program to build roads, schools and hospitals over the next five years.

The oil wealth is also trickling down in the economy and spreading beyond the elite. While vast disparities in wealth persist, economic output per person is expected to reach $13,600 this year, after averaging $8,000 throughout the 1990's. But mostly, the windfall has been used to improve public finances significantly. Debt as a share of annual economic activity has been cut to 51 percent, down from 119 percent in 1999. At the same time, the government has bolstered its foreign reserves, which now total $177 billion, including $135 billion held by the central bank, according to Samba. Five years ago, foreign holdings totaled less than $70 billion.

This kind of management has even earned Saudi Arabia kudos from the International Monetary Fund, which recently praised the government's "prudent macroeconomic management, the effective use of oil revenues to invigorate the development of the private sector and the economy's impressive performance." [Full text of IMF commendation of 5 Dec 2005 is on http://www.imf.org/external/np/sec/pn/2005/pn05161.htm ].

The privatization of Saudi Telecom, at the beginning of 2003, shook the stock market's lethargy and set off a trading frenzy that has not slowed since. Public offerings of insurers, banks and a mobile phone company have led to a doubling this year of the market's value, after gains of 85 percent in 2004 and 76 percent the year before. With a total capitalization of $620 billion as of November, the market is now larger than Spain's or South Korea's. More than $4 billion changes hands every day on the Riyadh exchange, twice as much as in Hong Kong, according to Timothy S. Gray, the managing director for investment banking at HSBC Saudi Arabia.

In contrast to the old handouts, stock-buying has become a principal means for sharing the bounty more widely. "They have used I.P.O.'s of public companies to disseminate the wealth to the little guys," Mr. Gray said. "In a country where only the big guys used to benefit, it's not an unreasonable objective." The most remarkable aspect of the stock market's performance is that it happened without Saudi Aramco, which remains a government-run concern. Bankers here expect that oil-related projects like the giant refinery venture between Aramco and Sumitomo of Japan might eventually sell stock to the public.

To be sure, the government has not deserted its oil sector. It plans to inject some $50 billion into it by 2009 to increase production and build refineries.

Some analysts also suspect that Saudi Arabia, to help balance the budget and sustain the economy, is seeking higher oil prices than it had in the past. Since the price collapse of 1998, the country's oil minister has ruthlessly enforced discipline within OPEC, taking the reins of the oil cartel and setting a more active policy. While OPEC has not identified a new price to defend, analysts believe the so-called floor might now be in the $40 to $45 range.

"We'd like to achieve rapid economic growth," said Amr Dabbagh, the governor of the country's foreign investment agency, the Saudi Arabian General Investment Authority. "Unless our economy grows twice as fast as our population, we'll have a challenge."

Achieving that kind of growth might be a challenge in itself. More than two-thirds of all Saudis were born since 1975 and the country, with a population of 17 million, has one of the world's highest population growth rates. Male unemployment, according to Samba, is about 9 percent.
Yet Saudi Arabia still relies on legions of foreign workers - from India, Bangladesh, the Philippines and Arab countries like Syria or Egypt - who number six million. They fill both low-paying and midmanagement jobs that Saudis either shun or are not trained to do. Getting more Saudis into the work force, a goal of a government "Saudization" program, would first mean overhauling the education system, which is run by the religious establishment and provides little practical training for the real world.

Asem Arab, an economics professor at the King Saud University of Riyadh, also runs a consulting firm with 20 employees. He acknowledged the problem he faced in filling jobs with Saudis. He said most of his employees were from Egypt, Syria or Jordan, and added: "We have eight Ph.D.'s, eight master's and just four Saudis."

The economic debate is taking place against the backdrop of a battle against home-grown radicals. Paramilitary police patrols and random checkpoints have become a common sight in the capital and other cities, along with heavy security, makeshift concrete barriers and machine-gun-equipped jeeps guarding most ministries, city landmarks and hotels frequented by foreigners. While no major terrorist act has occurred in nearly a year, leaders here hope that creating jobs will serve as the most effective counterpoint to the recruiters of Al Qaeda.

"You have a young and growing population, but I don't think they are as angry as they used to be," said Mr. Sheikh, the lawyer. "One of the fundamental reasons of their anger was economic, and the economic situation has improved drastically."